Enrolled Agent Practice Exam.
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1. Business meals with clients, properly documented and not lavish, are deductible at what portion?
- A. 100%
- B. 0% — meals are never deductible
- C. 50%
- D. 25%
Show answer & explanation
Answer: C
The baseline for ordinary business meals is a 50% deduction, with documentation of the business purpose and attendees. Entertainment itself — the game tickets around the meal — is nondeductible, a separation the exam tests.2. A taxpayer's spouse died in 2024. She has a dependent child at home and has not remarried. What filing status may she use for the two tax years after the year of death?
- A. Single, with no alternatives
- B. Head of household is her only option
- C. Qualifying surviving spouse, using married-filing-jointly rates
- D. Married filing jointly indefinitely
Show answer & explanation
Answer: C
With a dependent child and no remarriage, the surviving spouse uses qualifying-surviving-spouse status — joint rates — for the two years following the year of death (a joint return is filed for the death year itself). After the window closes, head of household typically follows.3. A December 30 paycheck sat unclaimed in the employer's office until January 3. When is it taxable to a cash-basis employee?
- A. In the earlier year — constructive receipt occurred when the check was available without restriction
- B. Never, if unclaimed for 90 days
- C. In whichever year the taxpayer elects
- D. In the later year, when physically picked up
Show answer & explanation
Answer: A
Constructive receipt taxes income when it is credited or made available without substantial limitation — declining to pick up an available check does not defer it. The doctrine exists precisely to defeat year-end timing elections.4. Which of the following must be INCLUDED in gross income?
- A. Municipal bond interest
- B. Life insurance proceeds paid by reason of death
- C. Unemployment compensation
- D. A gift of cash from a parent
Show answer & explanation
Answer: C
Unemployment compensation is fully taxable. Municipal interest is excluded by statute, gifts are excluded to the recipient (the donor may face gift tax), and death-benefit life insurance proceeds are excluded from the beneficiary's income.5. A single taxpayer sells her main home, owned and occupied for 6 of the last 8 years, with a $200,000 gain. How much is taxable?
- A. Nothing — the gain is within the $250,000 Section 121 exclusion
- B. It is deferred only if she buys a costlier home
- C. Half of it
- D. All $200,000
Show answer & explanation
Answer: A
Section 121 excludes up to $250,000 of main-home gain ($500,000 joint) when the two-of-five-year ownership and use tests are met — hers are, comfortably. The buy-a-bigger-house rollover rule died decades ago but survives as a distractor.6. Stock bought on March 10 of one year is sold on March 10 of the next. Is the gain long-term or short-term?
- A. Short-term — the holding period must EXCEED one year, and it is exactly one year
- B. Long-term — one year qualifies
- C. Long-term if sold after noon
- D. The taxpayer may choose
Show answer & explanation
Answer: A
Long-term treatment requires holding MORE than one year; a sale on the purchase-date anniversary is exactly one year and stays short-term. Selling one day later would flip it — the kind of precision the SEE tests.7. A father gifts his daughter stock with a $30,000 basis worth $50,000. She later sells it for $60,000. What is her gain?
- A. $60,000; gifts have zero basis
- B. $30,000 — she takes his carryover basis of $30,000
- C. $10,000, measured from the gift-date value
- D. Nothing; gifted stock is tax-free on sale
Show answer & explanation
Answer: B
Gifts of appreciated property carry the donor's basis, so her gain runs from $30,000. Fair value at gift only matters under the dual-basis rule when the property was worth LESS than basis at gift — not the case here. Inheritance, by contrast, would have stepped basis to death-date value.8. A taxpayer sells stock at a loss and buys the identical stock back 20 days later. What happens to the loss?
- A. Deductible at half value
- B. Lost forever with no basis adjustment
- C. Disallowed as a wash sale — the repurchase was within 30 days — and added to the new shares' basis
- D. Fully deductible this year
Show answer & explanation
Answer: C
Buying substantially identical securities within 30 days before or after a loss sale triggers the wash-sale rule: the loss is disallowed now but preserved by increasing the replacement shares' basis. It defers rather than destroys the loss.9. In a year with $9,000 of capital losses and no gains, how much can an individual deduct against ordinary income, and what happens to the rest?
- A. $3,000, with the rest expiring after five years
- B. Nothing; losses only offset gains
- C. $3,000 deducted; $6,000 carries forward indefinitely
- D. All $9,000 immediately
Show answer & explanation
Answer: C
Net capital losses offset up to $3,000 of ordinary income per year ($1,500 MFS), with unlimited-life carryforward for the excess. The five-year expiration belongs to other regimes; individual capital loss carryovers do not expire.10. Which taxpayer owes self-employment tax?
- A. An investor with only dividend income
- B. A freelance designer with $40,000 of Schedule C net profit
- C. A retiree living on Social Security
- D. An employee with only W-2 wages
Show answer & explanation
Answer: B
SE tax — the 15.3% combined Social Security and Medicare levy — applies to net self-employment earnings like Schedule C profits. Wages carry FICA through withholding instead, and investment or benefit income is not self-employment.11. For a taxpayer whose prior-year AGI was over $150,000, which estimated-payment safe harbor avoids an underpayment penalty?
- A. Paying 110% of the prior year's tax (or 90% of the current year's)
- B. No safe harbor exists at that income
- C. Paying 100% of prior-year tax, regardless of income
- D. Paying half of the current year's tax
Show answer & explanation
Answer: A
The prior-year safe harbor is 100% of last year's tax — but it rises to 110% when prior-year AGI exceeded $150,000. The alternative 90%-of-current-year harbor is income-blind. High earners quoting the 100% figure is the classic miss.12. A 45-year-old withdraws from his traditional IRA to buy a boat. Beyond income tax, what applies?
- A. The 10% additional tax on early distributions — no exception covers this
- B. A 50% penalty
- C. Nothing; IRA money is always penalty-free
- D. Only state tax
Show answer & explanation
Answer: A
Distributions before 59½ take the 10% additional tax unless an exception applies — disability, first-home purchase (capped), higher education, certain medical costs, among others. Boats are not on the list. The 50% figure recalls the old missed-RMD penalty, since reduced.13. To claim a child as a qualifying child, which set of tests must be met?
- A. Any two of five optional factors
- B. Only a DNA test
- C. Gross income and citizenship of the parent
- D. Relationship, age, residency, support, and joint-return tests
Show answer & explanation
Answer: D
A qualifying child must satisfy relationship, age (under 19, or 24 if a full-time student, or any age if disabled), residency (more than half the year), support (child didn't provide over half their own), and not file a joint return except for refund. All must hold — they are conjunctive, not menu choices.14. How do the American Opportunity Credit and the Lifetime Learning Credit differ structurally?
- A. AOTC covers the first four years of postsecondary education, is partly refundable, and requires at least half-time enrollment; LLC has no year limit, no enrollment floor, and is nonrefundable
- B. They are identical except in name
- C. LLC is refundable; AOTC is not
- D. AOTC applies only to graduate school
Show answer & explanation
Answer: A
The AOTC is the undergraduate-years credit — four years, degree-seeking at least half-time, 40% refundable; the LLC is the everything-else credit — any level, any number of years, courses to acquire job skills, but nonrefundable. Both can never be claimed for the same student in the same year.15. For divorces finalized after 2018, how is alimony treated for tax purposes?
- A. Not deductible by the payer and not income to the recipient
- B. Deductible by the payer and income to the recipient
- C. Taxed twice
- D. Deductible by both parties
Show answer & explanation
Answer: A
Post-2018 divorce instruments carry the new regime: no deduction, no inclusion. The old deductible/includible treatment survives only for pre-2019 agreements not modified to adopt the new rule — a two-regime world the exam loves.16. What does a Health Savings Account require of its owner, and what is its signature tax feature?
- A. Medicare enrollment; employer funding only
- B. Any insurance at all; withdrawals are always taxed
- C. Coverage under a high-deductible health plan; contributions, growth, and qualified medical withdrawals are all untaxed
- D. No insurance; it is an ordinary savings account
Show answer & explanation
Answer: C
HSA eligibility requires HDHP coverage (and no disqualifying other coverage; Medicare enrollment ends eligibility). The triple tax benefit — deductible in, tax-free growth, tax-free qualified withdrawals — is unique in the code.17. A taxpayer donates $400 cash to a charity. What documentation does the deduction require?
- A. A contemporaneous written acknowledgment from the charity, since the gift is $250 or more
- B. An appraisal
- C. Nothing; word of honor suffices
- D. Only a canceled check, at any amount
Show answer & explanation
Answer: A
Cash gifts of $250 or more need a contemporaneous written acknowledgment stating the amount and whether goods or services were received; smaller cash gifts get by with bank records. Appraisals belong to large property donations, not cash.18. A W-2 employee works from a home office her employer requires. May she deduct home-office expenses on her federal return?
- A. Only if she works over 50 hours a week
- B. Yes, like any business owner
- C. No — the employee home-office deduction is suspended; the deduction belongs to self-employed taxpayers
- D. Yes, but only the internet bill
Show answer & explanation
Answer: C
Unreimbursed employee expenses — the old home-office route for W-2 workers — are suspended miscellaneous itemized deductions. Self-employed taxpayers still deduct a qualifying home office (exclusive and regular use) on Schedule C.19. What must be true of a home office for a self-employed taxpayer to deduct it?
- A. It must be a separate structure in all cases
- B. It must occupy over half the home
- C. Occasional use is enough
- D. Exclusive and regular use as the principal place of business (or a place to meet clients)
Show answer & explanation
Answer: D
The twin pillars are exclusive use and regular use, for a space that is the principal place of business or regularly used to meet clients — administrative use can qualify a space as principal. The kitchen-table office fails exclusivity, the classic disqualifier.20. An activity has produced losses for six straight years, run casually with no records. The IRS reclassifies it. What is the consequence?
- A. As a hobby, its income is taxable but its expenses are not deductible against other income
- B. Only half the losses are allowed
- C. The activity becomes tax-exempt
- D. All losses stand as filed
Show answer & explanation
Answer: A
Hobby classification is asymmetric: income counts, but the losses stop offsetting other income. Profit motive is judged on the facts — businesslike operation, expertise, time invested, profit history — and casual, recordless operation loses that argument.21. Who must file Schedule C rather than reporting wages: an office worker paid on a W-2, or a rideshare driver paid gross fares with no withholding?
- A. The office worker
- B. The rideshare driver — an independent contractor reporting business income and expenses on Schedule C
- C. Neither; Schedule C is only for corporations
- D. Both of them
Show answer & explanation
Answer: B
Independent contractors report business receipts and expenses on Schedule C and pay SE tax on the net; employees report W-2 wages with FICA already withheld. Classification follows control and independence factors, not the worker's preference.22. A dependent child has substantial unearned investment income. What does the 'kiddie tax' do to it?
- A. Makes children's investment income tax-free
- B. Applies only to earned wages
- C. Taxes unearned income above the threshold at the PARENTS' marginal rate
- D. Taxes it at a flat 50%
Show answer & explanation
Answer: C
The kiddie tax defeats income-shifting: a child's unearned income beyond the small threshold is taxed at the parents' rate. Earned income — actual wages — stays at the child's own rate, which is why the rule targets investment income specifically.23. A taxpayer received a $1,000 state income tax refund. When is any of it federally taxable?
- A. Only if the state tax was deducted as an itemized deduction in the prior year and produced a tax benefit
- B. Always, in full
- C. Never
- D. Only if over $5,000
Show answer & explanation
Answer: A
The tax benefit rule governs: a refund is income only to the extent the earlier deduction reduced tax. Standard-deduction filers got no benefit from state taxes, so their refunds are untaxed — the analysis, not the amount, decides.24. Social Security benefits are received by a high-income retiree. What is the MAXIMUM portion that can be federally taxable?
- A. 0% — benefits are never taxed
- B. 100% of the benefits
- C. 85% of the benefits
- D. 50% at every income level
Show answer & explanation
Answer: C
Depending on provisional income, zero, up to 50%, or up to 85% of Social Security benefits enter gross income — 85% is the statutory ceiling. No income level makes benefits fully taxable.25. An early-career taxpayer wants retirement contributions that are taxed now but withdrawn tax-free later. Which account matches?
- A. A 401(k) with pre-tax deferrals
- B. A traditional deductible IRA
- C. A taxable brokerage account
- D. A Roth IRA — after-tax contributions, qualified distributions tax-free
Show answer & explanation
Answer: D
Roth accounts flip the traditional deal: no deduction now, but qualified distributions — after five years and age 59½ — emerge tax-free, and Roth IRAs impose no lifetime RMDs on the owner. Traditional accounts defer tax rather than eliminate it.26. A new C corporation asks how its profits reach shareholders. What is the tax path?
- A. Only shareholders ever pay tax
- B. Only the corporation ever pays tax
- C. Profits flow through untaxed to shareholders
- D. The corporation pays tax on earnings, and shareholders pay again on dividends — two levels
Show answer & explanation
Answer: D
C corporations are taxpaying entities; distributed earnings are then taxed to shareholders as dividends — the double taxation that pass-through structures (S corporations, partnerships) exist to avoid.27. Which requirement must a corporation meet to elect S status?
- A. Two classes of stock minimum
- B. Foreign incorporation
- C. No more than 100 shareholders, all eligible (generally individuals, certain trusts and estates), one class of stock, and a domestic corporation
- D. At least 500 shareholders
Show answer & explanation
Answer: C
S eligibility is a checklist: domestic corporation, ≤100 shareholders (family members can count as one), eligible shareholders only — no partnerships, corporations, or nonresident aliens — and a single class of stock. The election rides Form 2553 with all shareholders consenting.28. A partner receives a guaranteed payment for services to the partnership. How is it taxed to her?
- A. As a capital gain
- B. As a tax-free draw
- C. As ordinary income subject to self-employment tax, regardless of partnership profits
- D. As W-2 wages
Show answer & explanation
Answer: C
Guaranteed payments — compensation determined without regard to partnership income — are ordinary income to the partner and subject to SE tax; the partnership deducts them. Partners are not employees of their partnership, so no W-2 treatment.29. A partner's basis in her partnership interest matters most for which reason?
- A. It sets her voting power
- B. It has no tax significance
- C. Losses pass through only up to her basis; distributions beyond basis trigger gain
- D. It fixes her share of management duties
Show answer & explanation
Answer: C
Basis is the tax bank account: it caps deductible pass-through losses (excess is suspended until basis returns) and measures when distributions become taxable gain. Contributions, income and liabilities raise it; losses and distributions lower it.30. An S corporation's sole shareholder-employee takes no salary but large distributions, avoiding payroll tax. What is the IRS's position?
- A. S corporations may never pay distributions
- B. The structure is unassailable
- C. Salary is optional for owners
- D. Reasonable compensation must be paid as wages before distributions — the IRS can recharacterize distributions as salary
Show answer & explanation
Answer: D
Shareholder-employees must take reasonable compensation for services rendered, subject to payroll taxes; zero-salary-all-distribution structures invite recharacterization, back payroll taxes and penalties. It is the most-litigated S corporation issue.31. Founders transfer appreciated property to a new corporation solely for its stock and end up controlling 85% of it. Is gain recognized?
- A. No, and their stock basis is stepped up to market
- B. Yes, always, on any incorporation
- C. No — Section 351 defers gain when transferors of property receive stock and control 80% or more immediately after
- D. Yes, unless the corporation is foreign
Show answer & explanation
Answer: C
Section 351 makes incorporation tax-neutral: property for stock with 80% control immediately after means no recognized gain, with carryover basis preserving it for later. Boot received would trigger gain to that extent — and the basis is carryover, never a step-up.32. A business buys equipment and wants the fastest possible deduction rather than multi-year depreciation. Which provision does that?
- A. No provision permits acceleration
- B. Deducting it as a repair
- C. Straight-line depreciation over 39 years
- D. Section 179 expensing — electing to deduct qualifying property in the year placed in service, within annual limits
Show answer & explanation
Answer: D
Section 179 lets businesses elect immediate expensing of qualifying tangible property up to indexed annual limits, with bonus depreciation as a companion regime. Capitalizing a new asset as a 'repair' inverts the actual rule.33. A new restaurant spends $8,000 investigating and launching before opening day. How are these start-up costs treated?
- A. Deducted only when the business closes
- B. Up to $5,000 deducted immediately (phased down for large totals), the rest amortized over 180 months
- C. Never deductible
- D. Fully deductible whenever paid
Show answer & explanation
Answer: B
Start-up and organizational costs each allow a first-year deduction of up to $5,000 (reduced dollar-for-dollar above $50,000 of such costs), with the remainder amortized over 180 months from the month business begins. Waiting for closure describes abandonment loss, not the launch rule.34. Which taxpayer may generally use the CASH method of accounting?
- A. No business; accrual is universal
- B. Any C corporation of any size
- C. A small service business meeting the gross-receipts test
- D. Only businesses with inventory
Show answer & explanation
Answer: C
Small business taxpayers under the average-annual-gross-receipts test may use cash accounting even with inventories (treated as non-incidental materials); large C corporations are pushed to accrual. Inventory historically forced accrual — the modern rule relaxed exactly that.35. Which employment tax is paid by the EMPLOYER alone, with no employee withholding?
- A. Federal unemployment tax (FUTA)
- B. The employee half of Social Security
- C. Additional Medicare tax on high earners
- D. Federal income tax withholding
Show answer & explanation
Answer: A
FUTA is employer-only, reported on Form 940; Social Security and Medicare split between employer and employee via Form 941 withholding, and income tax withholding is entirely the employee's money. The additional Medicare tax is withheld from the employee.36. An investor wants to swap a rental building for another rental property tax-deferred under Section 1031. What limits apply today?
- A. Any property, including equipment and crypto, qualifies
- B. Only primary residences qualify
- C. Like-kind exchange treatment is limited to REAL property held for investment or business use
- D. 1031 was repealed entirely
Show answer & explanation
Answer: C
Post-2017, Section 1031 covers only real property held for investment or productive use — personal property exchanges (equipment, vehicles) lost eligibility. Primary residences use Section 121, an entirely different provision.37. A business sells land for payments spread over five years. How is the gain reported by default?
- A. All in the final year
- B. Never, if payments span over three years
- C. All in the year of sale, no alternatives
- D. Under the installment method — gain recognized proportionally as payments arrive
Show answer & explanation
Answer: D
Installment reporting is the default for qualifying sales with payments after the sale year: each payment carries its gross-profit percentage of gain. The seller may elect out and report everything up front — dealers and inventory are excluded from the method.38. Shares are sold at a loss to the seller's brother. What is the tax outcome for each of them, now and on his later resale?
- A. The loss doubles
- B. The loss is disallowed between related parties; his later gain is reduced by the disallowed loss
- C. The loss is fully deductible
- D. The brother inherits the loss to deduct
Show answer & explanation
Answer: B
Section 267 disallows losses on sales to related parties — siblings included — but the buyer may offset later gain by the previously disallowed amount. The loss never transfers as a deduction; it survives only as that gain offset.39. What does the qualified business income (QBI) deduction offer owners of pass-through businesses?
- A. Nothing; it applies only to C corporations
- B. Exemption from all tax on business income
- C. A deduction of up to 20% of qualified business income, subject to income-based limits and service-business restrictions
- D. A credit equal to payroll taxes
Show answer & explanation
Answer: C
The QBI deduction gives sole proprietors, partners and S shareholders up to 20% of qualified business income, with wage/property limits and specified-service phase-outs at higher incomes. C corporations are outside it — they got the rate cut instead.40. Equipment fully depreciated to a zero basis sells for $15,000. How is the gain characterized?
- A. Entirely long-term capital gain
- B. Ordinary income up to the depreciation taken — Section 1245 recapture
- C. A casualty loss
- D. Tax-free return of capital
Show answer & explanation
Answer: B
Section 1245 recaptures depreciation on personal property as ordinary income: gain up to the depreciation claimed loses capital treatment. Only gain beyond original cost would reach Section 1231's capital-gain territory.41. A wholesaler's customer goes bankrupt owing $12,000 on account (previously included in accrual income). A friend also fails to repay a $3,000 personal loan. How do the two write-offs differ?
- A. Both are long-term capital losses
- B. The business bad debt is an ordinary deduction; the nonbusiness bad debt is a short-term capital loss, only when wholly worthless
- C. Both are ordinary deductions
- D. Neither is ever deductible
Show answer & explanation
Answer: B
Business bad debts deduct as ordinary losses, with partial worthlessness allowed; nonbusiness bad debts deduct only when totally worthless, and then as short-term capital losses subject to the $3,000 limitation. Classification decides everything.42. A contractor deducts the daily drive from home to his first job site as a business expense. Is it allowed?
- A. Yes, at half the standard mileage rate
- B. Yes; all work-related driving is deductible
- C. Only if the commute exceeds 50 miles
- D. No — commuting between home and a regular work location is personal and nondeductible
Show answer & explanation
Answer: D
Commuting is personal regardless of distance. Deductible travel begins between work locations — job site to job site — or from a qualifying home office to client sites, which is what makes the home-office rules valuable to the self-employed.43. An employer reimburses employee travel under a plan requiring business substantiation and return of excess advances. How are the reimbursements treated?
- A. As an accountable plan — reimbursements are excluded from employees' wages
- B. As nondeductible to the employer
- C. As bonus wages subject to payroll tax
- D. As dividends
Show answer & explanation
Answer: A
Accountable plans — business connection, substantiation, return of excess — keep reimbursements out of W-2 wages entirely. Fail any prong and the payments become taxable compensation; the plan's mechanics, not its label, control.44. Two people form an LLC and file no tax elections. How is it classified for federal tax by default?
- A. As a partnership — multi-member LLCs default to partnership; single-member LLCs are disregarded
- B. As an S corporation automatically
- C. As a C corporation automatically
- D. As tax-exempt
Show answer & explanation
Answer: A
Check-the-box defaults: one member — disregarded entity; two or more — partnership. Corporate treatment requires an election (and S status a further election on top). Nothing about the LLC form itself creates a corporation.45. Which practitioners hold UNLIMITED rights to practice before the IRS?
- A. Annual Filing Season Program participants
- B. Anyone with a PTIN
- C. Only attorneys
- D. Enrolled agents, CPAs, and attorneys
Show answer & explanation
Answer: D
The unlimited-practice trio is EAs, CPAs and attorneys — any taxpayer, any matter, any IRS office. A PTIN alone permits paid preparation, not representation, and AFSP participants hold only limited rights for returns they prepared.46. Under Circular 230, when may a practitioner charge a contingent fee?
- A. Only for returns showing refunds
- B. Only in limited cases — such as IRS examination challenges, refund claims under review, and judicial proceedings — not for preparing original returns
- C. Never, in any circumstance
- D. For any service whatsoever
Show answer & explanation
Answer: B
Circular 230 confines contingent fees to narrow settings — services in connection with an IRS examination or challenge, certain refund claims, and judicial proceedings. Charging contingently to prepare an original return invites exactly the aggressive-position incentive the rule targets.47. A client fires her EA mid-dispute and requests her records back. The bill is unpaid. What does Circular 230 require?
- A. Holding all records until payment
- B. Destroying the file
- C. Prompt return of the client's records needed to comply with tax obligations — nonpayment does not excuse it
- D. Sending records only to the IRS
Show answer & explanation
Answer: C
Client records necessary for compliance must be returned promptly on request, fee dispute or not (a narrow state-law lien exception exists for certain practitioner-prepared documents). The retaining lien as leverage is precisely what the rule forbids.48. What is the difference between Form 2848 and Form 8821?
- A. 8821 grants representation; 2848 is informational
- B. Both are only for corporations
- C. They are interchangeable
- D. Form 2848 grants power of attorney to represent; Form 8821 only authorizes receiving tax information
Show answer & explanation
Answer: D
The 2848 appoints a representative — advocacy, argument, signatures within its scope; the 8821 merely opens the information window. An 8821 holder cannot argue the case, a distinction the exam tests both directions.49. An EA is found to have willfully evaded her own taxes. Which office acts, and what sanctions are on the table?
- A. No office; personal taxes are private
- B. The Tax Court, via jail sentences
- C. The local bar association
- D. The IRS Office of Professional Responsibility — censure, suspension, disbarment from practice, and monetary penalties
Show answer & explanation
Answer: D
OPR enforces Circular 230; willful failure to comply with one's own tax obligations is disreputable conduct supporting censure, suspension or disbarment, plus monetary penalties. Criminal prosecution is a separate track through the courts.50. A preparer files 60 individual returns per year, all on paper at clients' insistence — without collecting any waivers. What rule is being ignored?
- A. Only corporate returns must be e-filed
- B. None; filing method is free choice
- C. A rule capping returns at 50
- D. The e-file mandate — specified preparers filing more than 10 covered returns must file electronically, with documented client opt-outs
Show answer & explanation
Answer: D
Specified tax return preparers expecting to file more than 10 covered returns must e-file; a client's genuine preference for paper is honored through a documented election, not the preparer's default. Sixty paper returns with no waivers is a mandate violation.51. A preparer claims the earned income credit for a client with thin, contradictory information. What does due diligence require?
- A. An in-home visit to the client
- B. Completing Form 8867, making reasonable inquiries when information seems incorrect, and keeping records — with a penalty per failure
- C. Denying every EITC claim to be safe
- D. Nothing beyond entering the numbers
Show answer & explanation
Answer: B
Refundable-credit due diligence requires the Form 8867 checklist, knowledge-based inquiries when facts look inconsistent, and record retention — each failure carrying its own indexed penalty. The duty is diligence, not denial.52. How long must a paid preparer retain copies (or a list) of returns she prepared?
- A. Indefinitely, by statute
- B. Ten years
- C. One filing season
- D. Three years after the close of the return period
Show answer & explanation
Answer: D
Preparers keep completed copies or a client list for three years after the return period closes — a distinct clock from the taxpayer's own record-keeping and from the IRS's assessment statute.53. How long does the IRS generally have to assess additional tax, and what extends or removes that limit?
- A. One year, always
- B. Ten years for every return
- C. No limit ever exists
- D. Three years from filing; six years for omissions over 25% of gross income; no limit for fraud or unfiled returns
Show answer & explanation
Answer: D
The assessment ladder: three years standard, six for substantial (25%+) gross-income omissions, unlimited for fraud or no return. Ten years is the COLLECTION statute after assessment — a separate clock candidates constantly swap.54. A taxpayer discovers an overpayment. Within what period must the refund claim be filed?
- A. Five years from the return's due date
- B. The later of three years from filing the return or two years from paying the tax
- C. One year from discovery
- D. Any time, without limit
Show answer & explanation
Answer: B
The refund window is the later of 3-years-from-filing or 2-years-from-payment, with recovery capped by look-back rules tied to which prong applies. Discovery date is irrelevant — sympathy does not extend the statute.55. A taxpayer cannot pay a large assessed liability and asks about settling for less. Which IRS program addresses this, and on what grounds?
- A. A refund claim
- B. Automatic forgiveness after five years
- C. An offer in compromise — doubt as to collectibility, doubt as to liability, or effective tax administration
- D. There is no settlement mechanism
Show answer & explanation
Answer: C
Offers in compromise settle liabilities for less than full payment on three grounds — most commonly doubt as to collectibility measured by reasonable collection potential. Installment agreements pay in full over time; the OIC is the compromise vehicle.56. The IRS issues a Final Notice of Intent to Levy. How long does the taxpayer have to request a Collection Due Process hearing?
- A. 30 days
- B. 10 days
- C. One year
- D. There is no hearing right
Show answer & explanation
Answer: A
The CDP request window is 30 days from the final notice; a timely request pauses levy action and preserves Tax Court review. Missing it leaves only an equivalent hearing with weaker protections — the deadline is the protection.57. What is the difference between a federal tax LIEN and a LEVY?
- A. They are synonyms
- B. Liens apply only to businesses
- C. A levy is the claim; a lien is the seizure
- D. A lien is the government's legal claim against property; a levy actually seizes property or rights to it
Show answer & explanation
Answer: D
The lien arises automatically upon assessment, demand and nonpayment, encumbering property and priority; the levy is the enforcement act — taking wages, accounts or assets. Claim versus seizure, in that order.58. Under IRS rules, who is required to obtain a Preparer Tax Identification Number (PTIN)?
- A. Every taxpayer who self-prepares
- B. Only volunteers at tax clinics
- C. Anyone who prepares, or substantially helps prepare, federal tax returns for compensation
- D. Only enrolled agents
Show answer & explanation
Answer: C
The PTIN requirement follows compensation: paid preparers and those who substantially assist for pay need one and must renew annually. Volunteers and self-preparers are outside it — payment is the trigger.59. Before submitting a return position with no substantial authority and no disclosure, what does the preparer risk under the code?
- A. Loss of the client's refund
- B. Nothing; positions are the client's problem
- C. Automatic disbarment with no process
- D. The unreasonable-position preparer penalty — greater when the conduct is willful or reckless
Show answer & explanation
Answer: D
Preparer penalties attach to unreasonable positions — those lacking substantial authority (or reasonable basis with disclosure) — and escalate for willful or reckless conduct. The client's own accuracy penalties run on a parallel, separate track.60. During an IRS examination, the auditor asks the EA-represented taxpayer to attend an interview. Must the taxpayer appear personally?
- A. The EA decides unilaterally
- B. Only if the refund exceeds $10,000
- C. Generally no — a taxpayer with a valid POA may be represented without appearing, unless the IRS issues an administrative summons
- D. Yes, always and immediately
Show answer & explanation
Answer: C
Representation rights let the practitioner stand in for the client in ordinary examination proceedings; the IRS can compel personal appearance only through a summons. That buffer is much of what taxpayers hire representation for.
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Key facts: Enrolled Agent exam
The Enrolled Agent is administered by Internal Revenue Service (IRS), with a Pass all three SEE parts within three years result.
This free Enrolled Agent practice test has 60 original questions written to Internal Revenue Service (IRS)'s official content outline, last checked against it on August 7, 2026. Every question shows a worked explanation, and nothing here requires a signup.
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Official sources
Every exam fact on this page traces to a primary document published by the body that administers the exam.
- Become an Enrolled Agent — IRSInternal Revenue Service (IRS)irs.gov
- Maintain Your Enrolled Agent Status — IRSInternal Revenue Service (IRS)irs.gov
- Enrolled Agent Information — IRSInternal Revenue Service (IRS)irs.gov
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Frequently asked questions
Which part should I study first?
Most candidates start with Part 1 (Individuals) because 1040 material is the most familiar, take Part 3 (Representation) second for its shorter runway, and finish with Part 2 (Businesses), which carries the most new material. The topic chips in this bank mirror the three parts, so you can drill whichever part is next on your calendar.
Why doesn't this bank quote this year's standard deduction and contribution limits?
Because they change every year, and a practice bank hard-coding them trains answers that expire each January. These questions test the structural rules — basis regimes, holding periods, statutes of limitations, entity requirements — that stay stable. Pull current-year dollar figures from the IRS's current publications in your final review week.
How accurate should I be before scheduling a part?
Hold 80% or better on fresh mixed drills for that part. The three-year completion window removes deadline pressure, so there is no reason to sit underprepared — especially with each attempt carrying its own testing fee through PSI.
Part 3 looks short — is it easy?
It is the part working preparers most often underestimate. It tests exact day-counts (30-day CDP window, 3/6/unlimited assessment statutes, 3-year preparer retention) and precise form functions (2848 versus 8821) that daily practice blurs. Drill it with the same rigor as the tax-law parts.